NewMarket Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods. NewMarket’s principal business is petroleum additives, comprising lubricant and fuel additives. “All other” includes its tetraethyl lead business and certain contracted manufacturing and services.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $516.1 million | $540.9 million | $1,547.8 million | $1,661.2 million |
| Gross profit | $177.4 million | $174.8 million | $531.4 million | $525.8 million |
| Operating profit | $101.8 million | $97.6 million | $294.5 million | $286.3 million |
| Net income | $71.4 million | $62.0 million | $197.8 million | $184.7 million |
| Diluted EPS | $6.03 | $5.08 | $16.68 | $14.94 |
| Cash dividends declared per share | $1.60 | $1.40 | $4.80 | $4.20 |
- Sales declined 4.6% in Q3 and 6.8% for the nine months. Petroleum additives sales fell 4.4% and 6.9%, respectively; “all other” sales were $3.7 million and $13.2 million.
- Gross margin increased to 34.4% from 32.3% in Q3 and to 34.3% from 31.7% for the nine months. Consolidated operating margin rose to 19.7% from 18.1% in Q3 and to 19.0% from 17.2% for the nine months.
- Petroleum additives operating profit was $106.4 million in Q3 versus $100.5 million, and $309.3 million for the nine months versus $299.6 million. Its operating margin was 20.8% versus 18.7% in Q3 and 20.2% versus 18.2% for the nine months.
Liquidity, cash flow and debt
- Nine-month operating cash flow was $259.5 million, up from $188.3 million. Capital expenditures were $101.7 million versus $84.2 million; operating cash flow less capital expenditures was $157.8 million versus $104.1 million.
- Cash and equivalents were $187.9 million at September 30, 2016, up from $93.4 million at year-end 2015. About $180.5 million was held by foreign subsidiaries; a significant portion was designated indefinitely reinvested.
- Long-term debt was $531.4 million, up from $490.9 million, including $350 million principal of 4.10% senior notes due 2022, $180 million outstanding on the revolver, and a $5.0 million Singapore facility capital lease. The $650 million revolving facility had $466.4 million unused, net of letters of credit.
- Working capital was $581.1 million and the current ratio was 3.17:1, versus $504.7 million and 2.91:1 at year-end 2015. The company reported compliance with debt covenants; leverage and interest coverage ratios were 1.33 and 22.44, respectively.
- Cash dividends paid were $56.9 million and share repurchases were $35.8 million for the nine months. Management said operating cash and available revolver capacity should cover operating needs and planned capital expenditures for at least the next 12 months.
Changes, outlook and risks
- Management attributed lower sales chiefly to lower selling prices, with lower shipments also contributing. Nine-month petroleum additives shipments declined about 1.6%; Q3 worldwide shipment volume was approximately unchanged. Asia Pacific was the exception to sales declines across most regions.
- Lower raw-material costs were the primary driver of improved gross profit, more than offsetting the adverse effects of selling-price and volume variances. SG&A was essentially flat; R&D expense declined about $2.0 million for the nine months.
- Interest expense increased, primarily due to higher average debt, partly offset by a lower average interest rate. The effective tax rate fell to 29.2% from 31.9% for the nine months, reflecting factors including geographic income mix and the U.S. R&D tax credit.
- Management expected solid petroleum additives performance in 2016 and long-term industry shipment-demand growth of 1%–2% annually, with a goal to outgrow the industry. It did not provide specific numerical earnings guidance. 2016 capital spending was expected to exceed 2015’s $126 million, including the Singapore facility and other manufacturing and R&D infrastructure. Phase one in Singapore was complete and phase two was underway.
- The company terminated its fully collateralized Goldman Sachs interest-rate swap on September 7, 2016, settling the liability using approximately $21.9 million of its collateral deposit. The swap had generated fair-value changes through earnings; no swap liability remained at quarter-end.
- Risks include raw-material availability and price volatility, manufacturing disruptions, competition, customer losses, foreign exchange and international operating risks, regulation, environmental liabilities, and legal proceedings. Environmental remediation accruals were approximately $17 million. The company also disclosed an EPA TSCA inspection and a DOJ review of certain foreign activities and historical domestic conduct; it reported no indication of intended DOJ action and had made no provision for that matter.
Important facts for investors to verify
- Whether lower selling prices and shipment levels persist, and whether raw-material cost benefits continue to offset pricing pressure.
- Progress, spending and expected returns from the Singapore expansion and other planned capital investments.
- Cash accessibility and potential tax consequences if indefinitely reinvested foreign earnings were repatriated.
- Debt levels, covenant headroom, and the company’s capital-allocation balance among investment, dividends and repurchases.
- Developments in environmental remediation, the TSCA inspection and the DOJ review, including any change in estimated exposure.